At a time when the stock markets are volatile, direct equity investors are increasingly looking at stock systematic investment plans (SIPs) as the average cost of holdings improve if they stick to this strategy. An investor will not have to make lump sum investments at one time and can plan the amount he wants to invest as his convenience. Stock SIPs are offered by brokerage houses which help retail investors to invest in stocks directly in a staggered manner. However, such investments are usually done by those who have knowledge on stock markets as they have to shortlist the stocks themselves and invest. Investors of stock SIPs can see steady returns seen from equities as an asset class compared to gold and real estate.
No timing the markets
Stock SIPs—it can be one stock or few stocks—are like recurring deposits, or like mutual fund SIPs which allow an investor to buy units on a given date each month. The biggest advantage of SIP is that the investor doesn’t have to time the market. Investing every month ensures that one is invested during the highs and the lows. To be sure, SIPs make the volatility in the market work in favour of an investor and help average out the cost. This is done by cost averaging since the investments are made on a periodic basis, and not in a lump sum. Though the investment amount is fixed, more shares are purchased when the market stock trends down, and fewer units are purchased when the market stock moves up. Investors can choose the shares, set up an investment amount or quantity of shares and the date on which the stocks have to be bought. Stock SIPs are popular with those investors who have shortlisted some stocks based on their own research and want to build positions over a long period of time. Investors who do stock SIP do not want to take any chance during volatility and take the benefit of averaging and are sure of the medium term or long-term potential for appreciation in the stocks. Through stock SIPs, investors can accumulate stock over a longer term and iron out stock price volatility.
Prefer blue chip stocks
Experts say stock SIPs should ideally be done in blue chip stocks, or a combination of midcap and blue chip stocks. Blue chip stocks have good track record of giving consistent returns and are fundamentally strong as compared with small and med-cap stocks. Stock SIPs are ideal for direct equity investors as they do not have to pay mutual fund companies the expense ratio—2-2.5% of the assets under management. Investors can save the expense ratio by directly investing in equities, which can help them to increase the long-term returns. Brokerages offer a basket of three to four stock SIPs where the composition or weightage of the stocks can be altered in line with the requirement of the investor.
SIPs in mutual funds
Retail investors are also increasingly investing in SIPs of mutual funds. Investors are switching to equity SIPs as returns from fixed deposits, small savings schemes and even gold are falling. Investors are switching to equity SIPs as returns from fixed deposits, small savings schemes and even gold are falling. While SIPs of mutual funds are also available in debt funds, investors are preferring equity SIP because of double digit returns given by most funds in the last one year. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units are bought when the NAV is high. When the two situations are analysed together, the cost is averaged out and, the longer the time-frame of the investment, the larger will be the benefits of averaging. Moreover, SIPs have the advantage of compounding—one must start investing at an early age as longer the investment horizon, the bigger the benefits. If you start early, equity funds should constitute around 80% of portfolio as this asset class has been found to be the best bet for growing money over the long term.